In the past, orthodox economists argued that price liberalization, complete openness of economies and strong macroeconomic stabilization were enough to build reforms and lead to growth (Dornbush 1991, Blanchard et al., 1991). Privatization, followed by rapid privatization, came late to this program. During this period, institutions were taken for granted or irrelevant. No one spoke of strengthening property rights – whether privately or publicly owned – or of settling disputes or creating a sound credit system. Economic agents were supposed to adjust mechanically and automatically to macroeconomic policies. The slogans, unanimous, were limited to obtaining “correct” relative prices – that is to say, equal to those of the world market – and to reinforcing the so-called budgetary rigor. At the end of the 1990s, the same economists talked about business management, property rights, croony capitalism and the need to strengthen the application of the rule of law.
2After all, all the better, only idiots never change. However, this succession of ideas could create a sense of discomfort for anyone with any common economic sense.
4The prescriptions used in the late 1980s were a world apart from the one that is so fashionable today. Would this be a paradigm shift of primary importance? Only a few economists have described it as such (Stiglitz 1999a, 1999b, Rodrik 1998), but what was behind this change, and how and why the economists of the dominant thought have changed so quickly, was never explained, in anyway not at this time. It may be that economic policy and theory are about obeying the rules of fashion, as is the case with clothing, but as far as the author of these lines knows, fashion designers have never claimed to be scientists. or government advisers. We are therefore entitled to question the global significance of this rapprochement of thought towards institutions, at least as it is conceived by liberal orthodox economists.
From old to new: discovering the importance of institutions
Orthodox thought – which originated in prestigious US universities and is supported by international organizations, in particular the International Monetary Fund and the World Bank – focused in the late 1980s on three prescriptions:
price liberalization;
openness, through the removal of import and export restrictions, and the fastest possible transition to convertibility;
macroeconomic stabilization.
6 These requirements were contained in assertions, more and more frequent in the economic literature, such as “Come at fair prices” or “Make the budget constraint more rigorous”. Faced with each other, these requirements were supposed to function as follows: price liberalization and openness were supposed to transform the relative price matrix to make it similar to world prices, and thus enhance their efficiency in terms of allocation. of resources. Openness should also lead to an increase in competition, thus inducing a supply response to the new demand revealed by price liberalization. Combined with greater efficiency in resource allocation, producer adjustment and the so-called Schumpeterian process of “creative destruction” had to lead to greater productivity. Adherence to a tight budget constraint was thought to strengthen monetary relations throughout the economy, making the economic decision-making process more rational. Coupled with producer adjustment and creative destruction, this was supposed to significantly improve the investment process, both by making it more efficient and by creating new investment opportunities, which would attract new investors. online shopping in Pakistan
7The combination of increased productivity and investment was thus expected to drive growth through improved competitiveness, both in global markets and in domestic markets. Thus, in the late 1980s, orthodox thinking about the pathways to economic success was very simple (Figure 1).
Any economist with minimal knowledge of the theory and history of economic thought would be uncomfortable considering this pattern of thinking for the following reasons.
9First, the whole reasoning was based on prices, and especially on relative prices, considered as the main tool to guide economic actors towards what was described as “correct” choices. The problem here was – and still is today – that if prices had been able to fulfill this function, centralized planning would have been a much better option than the market economy (Lange 1936, Lerner 1944). It has been completely forgotten that what makes the market better than planning is that the knowledge needed to make the right choices and decisions is to a large extent tacit and not explicit. Prices are only a small part of the knowledge that is really needed.
Secondly, relying on competition to induce spontaneous producer adjustment raised much more complex problems than previously thought. Orthodox economists were clearly unable to understand that competition could have different meanings in different economic theories. If it was neoclassical competition, it was an automatic mechanism, but it also involved perfect and complete information, which is a clearly unrealistic assumption. If it was a competition in the sense of Schumpeter, it was not necessary to think of perfect and complete information, since Schumpeter very clearly criticized the neoclassical view of competition in that it relies only on prices, without taking into account the novelty of the product, technology, sources of supply or organization. However, the competitive process as defined by Schumpeter is not as obvious a process as one might think, because of the relationship between innovation and ownership. While innovation may be appropriate, agents have a stimulus for innovation, but innovation can not be diffused through the imitation process, which plays a very central role at Schumpeter. If, on the other hand, innovations can not be appropriate, imitation can be done, but economic agents no longer have incentives for innovation (Arrow 1971, Egidi 1996).
In addition, there is an additional problem in this area, which is the ability of the agent to evaluate what is new: how can we appreciate what we do not know? And if we knew it before, is it still an innovation? This is clearly a limit in the ability to link innovation and the market (Arrow 1983). It was thus possible to emphasize the obvious contradiction between the principle of innovation and that of private property: the guarantee of an authority external to the market – namely the State – is necessary to protect those who make inventions; the market is therefore not an institution capable of autonomously generating all the forces necessary for its efficient functioning (Egidi 1996: 46-48). Competition is an effective process if, and only if, it can rely on guidelines that the market can not generate on its own; these guidelines imply a kind of active public policy that includes regulation, spatial planning and industrial policies.
Finally, if we consider competition in the sense attributed to it by Hayek, on the one hand there is a contradiction with the insistence on prices, and on the other hand it would imply an insistence on institutions and rules since Hayek he himself was extremely clear about the need for these rules and institutions (Hayek 1960).
Thus the dominant thought on the pathways to growth was obviously based on shifting sands of theoretical incoherence, combining various theoretical views and practical experiences, which can not interact and are devoid of coherent overall reasoning. It is therefore not surprising that prescriptions emanating from orthodox economists have led to such serious problems in Russia (Sapir 1999). In fact, this finding of inconsistency was formulated, quickly and correctly, as early as 1993 (Bhaduri, Laski & Levcik 1993). The combination of price liberalization and openness almost destroyed Russian industry. This owes its salvation to the massive devaluation of 1998, following the crisis. The opening did not allow the adjustment of the producers; it only helped commodity producers to raise a high rent on the rest of the economy. Without the institutions, competition in Russia was a sad joke and privatization was not the mechanism to encourage efficiency that was needed. The implementation of a strict budget constraint, without taking into account technological constraints, has led to impossible choices, particularly in the energy and transport sector. This was the beginning of Russia’s chain of backlogs.
It must be admitted that the economists of the mainstream soon began to change their own conception. They began to insist on privatization as early as 1993, but never explain how property rights could be combined with a neoclassical approach to relative prices. In fact, what gives property rights their relevance is the fact that the information is imperfect and incomplete: in this context of imperfection, economic contracts can not be written perfectly and one is obliged to know who is responsible of what. Starting in 1995, the same group of mainstream economists began to discover institutions. Slowly, new terms, such as “corporate governance” or “rule of law”, became fashionable so that when the crash of 1998 struck Russia, a new conception of the dominant thinking about growth was born . Compared to what was said in the late 1980s, the change was impressive – at least in appearance – but of course, no one ever admitted that there were any mistakes in the original interpretation; the economists of the dominant thought are always right. This simple fact would have been enough to sow doubt in the mind of any honest economist about this new interpretatioThe new orthodox conception
The new conception of mainstream thinking now includes both an economic aspect and a politico-institutional aspect. The latter may be democratic or not, but in any case he insists on the respect of the law. In a sense, it is as if we had substituted for the old formula “strictly respect the budget constraint” a news that would prescribe: “Strictly observe the legal constraint. As for the economic aspect, the emphasis now is more on openness, with a financial dimension, than on obtaining “correct” relative prices.
16If we carefully examine the development of this interpretation, we find a mixture of old and new. Openness is still there, as one of the most important prescriptions, as it is supposed to give access to Western technology and attract foreign investment. Strict compliance with the legal constraint and the strengthening of the state are supposed to improve the property rights and, consequently, allow a better collection of the taxes; combined with foreign investment, they should also lead to improved business management.
Improved business management, coupled with access to Western technology and investment, is expected to lead to improved productivity and supply-driven growth. On the other hand, a better definition of property rights would improve tax collection, thus allowing for an increase in public spending, and therefore better infrastructure. This would lead to an endogenous growth process thanks to the externalities – which means that mainstream economists now take into account certain theoretical results of unorthodox thought – which adds its effects to the already mentioned mechanism of entrenched growth. by the offer. The economy would thus engage in a stable and sustained path of growth that would make the public budget more sustainable and also allow a better distribution of wealth, increasing the happiness of the whole population and also making it more willing to support the mechanisms of the market economy.
Figure 2 – The Revised Standard Scenario (versioIs this a movement towards realism?
Compared with the first interpretation, it is certainly much more realistic. Endogenous growth is a topic that has been the subject of much discussion over the last fifteen years, and a growing number of economists are convinced of the economic virtues of public spending on education and health. The mechanism of supply-driven growth also seems much more realistic than the idea of the relative price matrix. By the way, there is no doubt that people live better when the rule of law works and the law is actually implemented. Since the crash of 1998, it has been understood that the collection of taxes is much more important than reductions, always temporary, in public expenditures. In total, the new orthodox conception seems much better than the old one. Of course, there are still some areas of concern. Indulgence over the authoritarian rule is sometimes criticized from a moral point of view; even in the democratic variant, the definition of democracy may also raise certain problems. However, it seems that after a few years of confusions and contradictions, a new consensus is emerging, characterized by a central shift in its concern, which has shifted from macroeconomics to institutions.
19However, unorthodox economists are far from convinced by this new interpretation.
Divergences between theory and reality
If there are doubts, they are mainly due to the fact that there are still important differences between reality and what the dominant economic theory claims to be a realistic assessment of economic processes.
These doubts can be summarized as follows.
Openness is generally not enough to attract direct investment when demand is depressed. Trade liberalization and too rapid opening up may destroy market institutions (Rodrik 1997, 1998, Taylor 1994, Stiglitz 1998, 1999b). Trade liberalization leads to a boom in economic activity if, and only if, the economy is already able to produce marketable goods on world markets. Opening up to highly volatile short-term investments is destabilizing (Stiglitz 1999a, Rajan 1999); it may require a fixed exchange rate leading to overvaluation of the currency, which is profoundly destructive (Ocampo & Taylor 1998). Finally, the process of openness must be organized and directed, which can not be done quickly: to avoid perverse effects exceeding the potential virtuous effects, openness must be organized as a long-term process, which begins with the trade balance and ending with capital flows. Current literature is now very open about the destabilizing effects of short-term capital movements for emerging economies (Rodrik 1997). It is well known that the monetary control implemented by the central bank of Malaysia in September 1998, for example, has helped the country considerably to weather the Asian financial storm. Even in trade, import protection for the development of the domestic industry has worked quite well, contrary to what has been said in the last 15 years.
Democracy is very imperfectly defined by the rule of law and the three freedoms of speech, commerce and religion. A law can be considered as a kind of contract. In order for legality to be sufficient in itself, we should assume that the law takes into account all the situations and future consequences of its own implementation. Such an assumption is nothing less than the perfect information hypothesis, which is that of neoclassical theory. But, as we have already said, if we could live in a world of perfect and complete information, centralized planning would be a better option than the market economy. Orthodox economists are thus translating in law terms their biased concept of a perfect economic contract. If the information is neither perfect nor complete, then neither a contract nor a law can be considered sufficient in themselves. Therefore, legality can not be the only point of reference. In a real world, legality is a mirage if it can not count on legitimacy (Schmitt 1936) and this implies procedural rights – democracy as a system of institutionalized debate and controversy (Przeworski 1993) – as well as a demonstration of the adequacy of the system (which implies distributive justice, if all the results of a given action can not be fully calculated). Legality without legitimacy
If growth is not properly distributed, then social conflict can be as intense as in a stagnant society (remembering the social conflicts in Western Europe in the 1960s [Taylor 1991]). Distributive justice is as important as allocative efficiency, because in a world of imperfect information and individual action that may have unintended effects, equal access does not imply Equal opportunities, and equal opportunities do not imply that the successes or failures of individual strategies fully reflect the effectiveness of these strategies. The allocative justice would thus be a solution if, and only if, we could have made the hypothesis that the perfect information was a realistic datum. From the point of view of incentives, inequality in distribution is a positive contribution if, and only if, differences in income distribution are considered, by a large majority of the agents concerned, as reflecting differences in the effectiveness of individual economic strategies. If differences in the distribution of wealth are perceived as reflecting behaviors and strategies of rent or exploitation, or as reflecting the ability of a small minority to monopolize the economic system for its own profit, then inequality, in fact undermines the legitimacy of the entire social system. In this case, inequality can have a perverse incentive effect at the microeconomic level. In such a context, an economic distribution policy can make an important contribution to stable growth (Gordon 1995).
Thus does the history of this new dominant thought appear as biased as the old one; however, the biases are of a different order. There are still proposals that echo previous general unrealistic assumptions about the economic world, such as perfect information or the ability to write “complete” contracts. This is particularly true of how orthodox economists understand the rule of law. Their insistence on legality, without thinking of legitimacy, is typical of those who translate into their political science their own perception of a Walrasian world of perfect information. But information is never perfect, not only when writing economic contracts, but also when drafting laws and regulations. The problem of political legitimacy is thus as important as that of property, and legitimacy can not be defined by legality.
Other defects are more subtle; they derive from the transplantation, in economies in transition, of the experience of a few developed western economies, without questioning the differences in the general institutional contexts in both systems. Both endogenous and supply-driven growth mechanisms are realistic “stylized facts”. However, they do imply an institutional context that, if it actually existed in the transition economies, would mean that the transition is over. A central fact, that in developed and fast-developing countries the government, the state, and social, political, and economic institutions reinforce a kind of distributive justice, are completely neglected. The fact that the budget system works effectively (which means that public payments are stable and predictable) is also neglected. It should be added that the governance structures vary greatly from one country to another: the German system is different from that of the United States, the French system as it operated from the early 1950s to the end of the years. 1980 was also very specific, not to mention the Japanese system. Assuming that there is only one system, orthodox economists distort the facts and cast doubt on the importance, however real, of the requirement of governance.
The unorthodox interpretation: unification of macroeconomics and institutions
Before describing what might be an unorthodox conception of growth and economic development, and before explaining why it might be a more credible, realistic and functional proposition than the dominant new or old interpretation, it is necessary to insist on the conceptual and methodological differences between heterodox and orthodox economists.
1) While orthodox economists rely on mechanical metaphors to understand how an economic system works, heterodox economists insist on notions such as systems, evolution and feedbacks. This fact, which could be interpreted prima facie as an eminently theoretical distinction, is in fact at the center of the differences in applied and not theoretical propositions. Most orthodox assertions take the form “given the action (x), then the result is (y)”; “Inflation is always and everywhere a monetary phenomenon” or “if you finance your budget by the central bank, you will end up with hyperinflation” are typical examples. These classic assertions may be true in certain specific contexts, but heterodox economists disagree radically with their Orthodox colleagues when these claims are presented as the equivalent of a law. To consider that a human activity – and production, exchange and consumption are human activities – is governed by laws such as Newton’s Law, we should admit that human beings are like physical particles, incapable of think, have expectations, fear or innovate. Or we should assume that every human being is able to know, at any moment, not only the complete structure of the universe, but also the complete set of possible universes engendered by his actions. It has long been shown that equilibrium, to be a normative concept in economics, implies a perfect forecast hypothesis (Morgenstern 1976). Such an assumption is unrealistic and contradicts the facts; moreover-it must be repeated once more-if it were true, it would logically give a decisive advantage to centralized planning in relation to the market economy.
Reminding the mechanistic metaphor is therefore a decisive step towards a realistic understanding of economic activities. This involves understanding human action as being embedded in different social contexts, and knowing that individual behaviors are highly affected by these contexts. Recent research in both experimental psychology and simulation has completely destroyed classical orthodox assumptions about the generation of individual preferences (Tversky 1996, Tversky & Kahneman 1986).
272) Having said goodbye to the mechanistic metaphor, heterodox economists had to understand how and why a world populated by innovators, economic agents not endowed with a capacity for forecasting or perfect knowledge, does not end up in chaos. total. Basically, the answer has been in institutions and organizations. The real world economy is not an open space where individual agents, such as particles, confront their demand and supply; it is a historically and socially structured space, defined both by a set of institutions with their rules, constraints and stimulants and by a set of hierarchical organizations (companies and, of course, the state) with their laws, their internal rules and their sanctioning mechanisms. It is the given combination of institutions and organizations at a given time that determines individual preferences and behaviors, thus producing reaction action processes that are reasonably stable and upon which economic policy can be constructed. This is the second point of divergence between orthodox and heterodox economists.
In general, orthodox economists do not like the idea of institutions and organizations. Even when they recognize the need for an institutional context, they only insist on one or two institutions that then become the real center of their reasoning. And even if they use the same vocabulary as non-orthodox economists, with terms such as “institutions”, “rules” or “customs”, they are not able to understand their meaning. Because they recognize institutions only as a twofold set of stimulants and constraints, without understanding that to produce these rules, stimulants, and constraints, institutions need a social process that has specific implications for economic activity. They do not understand that institutions need organizations (there is no rule of law without judges, no lawyers and no policemen, and there are no judges and police without a state capable of pay enough so that they do not need to be corrupted to survive). There is no work discipline without business, but if the business world is fully dedicated to the paradigm of flexibility, companies can not survive because they require, like any hierarchical structure, a minimum degree of stability. If we destroy stability in the economic environment, perhaps by an excessive degree of competition, then we destroy businesses as hierarchical structures. We thus threaten the discipline of work and the division of labor.
293) This leads us to the third difference. Some orthodox economists are willing to recognize how institutions and organizations are interrelated. However, they persist in considering the formation process of this set of institutions and organizations as a spontaneous result of competition in the market, thus falling into three errors.
First, if market competition is efficient when it operates according to the rules and standards produced by institutions and organizations, how can this competition in the marketplace produce the required institutions and organizations? This is the circularity error.
31Second, if market competition can produce institutions and organizations, how can one be sure that it will be the proper institutions and organizations? Assuming a kind of Darwinian process of selecting institutions and organizations is tantamount to assuming environmental stability. Darwinian selection is effective when biological constraints remain unchanged for a long time. A spontaneous institutional selection would therefore imply a stationary environment, which is both opposed to the facts and contradictory with the very idea of innovation. This is the stationary error.
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Third, even if we could prove that spontaneous competition in the market could ever produce better institutions and organizations than the decision-making process, we should prove that the competition process generates this result in a period of time when the institutional response is appropriate for a given set of problems. But some problems require an immediate response for this answer to be effective. A hungry man, for example, needs bread on the spot, and not in a month. In a financial crisis, the response must be available within a few days, if not hours, or the crisis will spread and destroy everything in its path. Therefore, even if it is more efficient than an institution created by a decision, an institution generated spontaneously by the market could be less effective if it were available too late. Efficiency might be more important than efficiency, but this fact is not understood by orthodox economists who reason as if time did not matter. This constitutes the error of the infinite horizon. But if the institutions engendered by decisions matter, then we must understand the historicity of the institutional system. Since it is clearly impossible to make decisions about all problems simultaneously, the historical process of decision is always a process that combines change and continuity, novelty and innovation on the one hand, stability, continuity and routine on the other.
Implications of the unorthodox perspective in the context of transition
One can then summarize the differences between orthodox and unorthodox economists by three statements.
Unorthodox economists believe neither in absolute laws nor in pure chaos to understand economic activity; they rely on the concept of contingent systemic stability, which means that the behavior and preferences of individual agents can be understood as stable only through the understanding of systems of institutions and organizations situated in their context and in their history. Therefore, there are no eternal principles of economic policy, but only principles in a given context.
While the effectiveness of economic policy depends on the adequacy of prescriptions and the institutional context, the stability of the institutional system depends to some extent on the macroeconomic situation. Institutions and organizations are not just abstract concepts, they are also living systems that require resources and work to survive. If the macroeconomic situation, or economic policy, prevents a certain amount of resources and labor from being devoted to supporting these institutions and organizations, their effectiveness disappears rapidly, and the overall context becomes more and more open to change. instability and unpredictability, destroying the efficiency of competition in the market.
Spontaneous evolution or market competition can not entirely replace intentional decision. Systems of institutions and organizations are the product of social history and not evolutionary optimization.
These differences are particularly important in the context of the transition. If we take the transition seriously, it means a historical period during which a given set of institutions and organizations is no longer valid, without a new set being already fully in place. In such a situation, it is impossible to solve the problems of economic policy without simultaneously solving institutional problems. The opposition between macroeconomic policy and institutional politics that has been invading since 1990 has been extremely destructive. Similarly, highlighting or claiming to highlight one or two factors in determining what the future growth path will be is a complete mistake. Economic policy during the transition period must address both macroeconomic and institutional issues, not only at the same time, but also with sufficient attention to the linkages and feedbacks between these two categories of factors. Consistency between macroeconomic and institutional requirements is more important than the efficiency of individual prescriptions. This is a classic application of the second best theorem (Lancast
This obviously has direct consequences for what may be called the heterodox way of stable growth. This is why we can identify three main directions, which we will detail.
Focusing on the strategic adequacy of institutions, when one understands that these adequate institutions are not generated spontaneously, immediately raises the problem of building the legitimacy of the state. Without a state with such legitimacy, a society divided by conflicts of interest would lead to conflicting institutional strategies, thereby destroying the overall institutional context, even though some institutional building strategies Individuals could be locally effective. Here we have a second application of the second best theorem. Consistency in building institutions is more important than the perfection of potential individual institutions. The effectiveness of the overall system is not the sum of individual efficiencies, but is related to its internal coherence. As explained above, the legal dimension of the state is not sufficient; it would only be in an unrealistic and virtual world where everyone would have perfect information.
37The legitimacy of the state is linked to the notion of social contract, which ensures the cohesion of the national community. Insisting on the problem of coherence involves defining what needs to be done at the macroeconomic level to ensure that the necessary institutions can receive the necessary support. If sufficient wealth is not produced, institutions can not receive this support. They are destroyed then, and the effectiveness of the competition on the market with them. In such a situation, individual economic agents are more attracted to the appropriation of wealth (rent seeking) than to the production of wealth. In this case, even fewer institutions can be supported, and the entire social economic system is gradually collapsing. To avoid being trapped by such a downward spiral, voluntary actions must be undertaken to support economic activity, actions that would not have been necessary in an economy that would already be rich or in a social system already endowed with highly efficient institutions. Looking at economies in transition since the late 1980s, it is not the success of the transition that has led to growth but, as is evident in the case of China, it is high growth that has allowed the success of the transition. Trying to straighten out the entire institutional system in a shrinking economy is bound to fail. This is why the reconstruction of the social contract to ensure the legitimacy of the state is the first direction to follow, and the promotion of the internal market necessarily the second.
The fact that these decisions must be made, and that they are not spontaneously generated, implies that we think of the means necessary for the decision-maker. Choosing the legitimacy and support of a strong social contract is not enough. The state is not an abstract thing, it is a network of administrations, in real life, which requires means to be effective. Without a strong public finance system, giving some stability to decision makers, nothing can be effectively implemented because the legitimacy of the rule of law (L1 in Figure 3) is not enough. The problem of legitimacy is also important for the administrations and the state agencies responsible for implementing this institutional structure. The second level of legitimacy (L2 in Figure 3) is directly related to the means (and especially the financial means) available for public expenditure. This frequently forgotten truth is the third obvious direction. The path to stable growth thus involves acting in these three directions, as described in Figure 3.
From directions to prescriptions
The first direction of rebuilding the social contract is now the most important in Russia. As has already been written, transition has by definition implied a strong demand for institution-building activities. The states of the former Soviet Union, unlike Poland, the Czech Republic or Hungary, could not rely on anti-Russian sentiment as an approach to a social contract. In addition, the consequences of the initial transition years made this demand much stronger. The considerable impoverishment of a large majority of the population, combined with an accumulation of wealth by a small minority, as well as the concentration of economic and political power without respect for democratic principles, as still publicly defended by the “liberal” elite, have stretched Russian society to its limits. The development and spread of social pathologies such as criminal activities, “stowaway” behavior or lawlessness, with their classic implications (eg rapid increase in the rate of suicide or use of drugs) , testify to this fact. Even when economists pay the necessary attention to these sociological destructions, they usually forget the economic implications of these: dramatic loss of legitimacy of the rule of law (L1), resulting in great contractual instability and transaction costs high, along with the classic short-term view (which is usually destructive of investment), social conflict and inefficient structures and mechanisms of stimulation.
40Four steps must be taken to remedy this situation.
The right balance in the allocation (fairness) – or allocative equality – must be achieved, ensuring that economic and social opportunities are more directly available. This requirement implies a dramatic reduction of all tax and rule exemptions and any kind of bureaucratic discrimination (equal chance system for all); it also implies the reduction of bureaucracy and administrative complications concerning productive activities and the destruction of all monopolistic positions when they are not economically justified (as in particular in the retail trade); it still requires state control of “natural monopolies” (that is, activities where economies of scale economically justify considerable concentration), either through regulation or – if such regulation is too difficult to implement because of a corrupt local administration – through direct state control. The economic history of France and Italy from 1945 to 1980 shows that a limited measure of direct control by the State, through public ownership, decisively helps to avoid the most serious monopolistic effects , while demonopolization would become economically counterproductive.
Distributive equality – distributive justice – must be improved through economic and fiscal policies. The only allocative equilibrium could only reconstitute the social contract if we were in a world of perfect information without individual actions producing unintended effects. To be complete, this equilibrium would imply a) that each economic agent has a perfect understanding of the overall range of consequences of its actions; and b) that the action taken by the agent (x) does not limit the opportunities of the agent (y). In the real world, this equilibrium is necessarily incomplete, and some aspects of the social outcomes of individual actions must be considered unacceptable, thus depriving them of the stimulating effect that these results are supposed to have in liberal theory. This is the reason why distributive justice can not be replaced by this balance. In Russia, distributive justice could be strengthened mainly by taking back part of the rents of commodity exports and strengthening social benefits and equal access to health and education.
Corruption must be attacked as vigorously as possible. A corrupt administration destroys equality of opportunity and deeply undermines the social contract. In this context, symbolic cases of high-level corruption (at the government level or at the level of high-level federal or local officials) should be considered as a priority action goal to set an example, before tackling petty corruption. widespread. The creation of a special agent to investigate and prosecute high corruption and major economic crimes is probably a sad necessity.
The change
The exchange rate must be managed and can not be left to market forces alone. For an economy like Russia, this constraint has two aspects. First, a real exchange rate that is too high (ie a nominal exchange rate and indexed to the inflation rate between Russia and its partners) is destructive, as evidenced by the destruction of production. between 1994 and 1998 on the one hand, and its spectacular rebirth after the 1998 devaluation on the other. It is important to note that for a country that exports mainly raw materials and goods, the exchange rate is less important for export producers than for producers for the domestic market. The current revival of Russian industry is largely related to import substitution. Secondly, a low exchange rate is not without drawbacks. Internal consumers see their purchasing power reduced when the exchange rate is too low, which is detrimental to consumption and investment when imported goods can not be substituted for those produced locally. By the way, now is the time to re-evaluate import-substitution strategies, which had a bad reputation in the late 1970s without having undergone an honest and correct evaluation. The recent trend in the economic literature is to reassess these strategies in a more positive way, when they are part of a globally consistent economic strategy (Collins & Bosworth 1996, Rodrik 1997). The first requirement of this constraint is to set the level of the exchange rate that is most appropriate for economic policy objectives. The second problem is the stability of the real exchange rate. We can have medium-term stability on a statistical level, but in fact a short-term instability when the rate fluctuates violently under speculative attacks whose goal may be to push for overvaluation or devaluation. Fluctuations are highly destructive when they prevent domestic producers from having profit expectations and therefore investment plans; they disturb the price structure and create misunderstandings of economic opportunities. Since the end of the 1980s, economists have had considerable evidence that purely financial market systems are unable to prevent violent fluctuations and, on the contrary, increase them in a regrettable way (Rodrik 1998, Rajan 1999). This is why market-based convertibility, if implemented too early, before the institutional framework has been designed and implemented, is likely to become an obstacle on the road to development. This is also why exchange rate management is a priority from the point of view of rebuilding the internal market. This involves controlling capital flows and regulating the exchange rate, to place it at its best value (low, but not too low), and to make it stable and predictable not only in the long run, but – and especially – in the short term (Eatwell & Taylor 2000). Such a requirement implies close cooperation between the government agency responsible for implementing the development strategy and the central bank.
The development of a sound credit system is a prerequisite for sustainable growth (Sapir 1995a). Thus, after ten years of transition, there is still practically no consumer credit, and the credit to support investment and trade is extremely limited. In an economy where institutions are weak, such a system can not be market-based; it must be based on the bank, a proposal that even Harvard-based economists are now ready to support. A bank-based credit system involves vigorous regulation (the central bank’s iron fist), but also a process of injecting liquidity from the central bank into the banking system (Pitiot & Scialom 1993). Of course, the current rate of circulation relative to wealth in Russia (ie M2 in relation to GDP) is much too low. But the remonetisation of the Russian economy can only be done by printing new bank notes. It calls for the reconstruction of the banking system, which could be refinanced by the central bank. It must be said that even if such a system is moderately inflationary (and for economists, “moderately inflationary” would mean up to 40% -50% per year), it’s not a problem because inflation at such a level is not inconsistent with growth and investment (Bruno & Easterly 1996).
It is impossible to develop an internal market without a certain type of industrial policy, as the case of Japan (Okimoto 1989) and Taiwan (Wade 1990) amply prove. Such a policy is not about trying to pick winners, but about promoting a context from which winners might emerge. This policy could support demonopolization (in booming sectors where entry and transaction costs are low and economies of scale are not significant), as well as building large groups when they are needed (with high entry and transaction costs, and high levels of economies of scale). Such a policy should provide guidance for state regulation in the natural monopolies sector and also include a policy of public prices in energy and transport.
No internal market can develop healthy in a complete autarky. The promotion of trade with natural partners (in the case of Russia, the CIS partners) and the development of a regional trading area are part of an effective support to the internal market, as shown by the experience of Western Europe since the late 1940s. Before realizing a true free trade area, the promotion of transactions through a regional structured payments union such as the European Payments Union of 1949 (Kaplan & Schileiminger 1989) could give the necessary impetus.
Finally, it is extremely important to strengthen property rights, since any economic transaction involves a transfer of property rights (Dugger 1989). What must be emphasized here is that these property rights should not be confused with mere private property. Property rights are considered strong when one can determine indisputably who is responsible for what, whether that person is private or public. In some situations, renationalization may be necessary to redefine clear lines of accountability.
The third direction of growth-oriented public action in the Russian context could be strengthening the public finance system to give policy makers the tools they need.
This implies first increasing the federal share in these public finances, both in revenue and expenditure. Compared to any developed or developing federal country, the federal share in Russia is far too low. In the United States, it reaches 65%, and India 55% to 59%, while it reaches only 33% in Russia. Whatever the merits of the reform announced in May 2000 by President Putin about recentralization (and we believe that these merits are considerable), if this reform is not supported by a massive change in the distribution of income and expenses, it will remain a dead letter. Federal spending is a powerful instrument to rebalance the interregional imbalances that may appear and quickly destroy the country’s social structure in an era of rapid economic and institutional change (Munnell & Cock 1990). The risk of disintegration in Russia is probably less related to ethnic factors than to massive economic imbalances, which develop as public spending is both being reduced and displaced from the federal center to regional policymakers (Sapir 1995b). ).
After years of a weak and losing state, Russia needs some kind of constitutional guarantee for the discipline of public payments. State non-payments and the resulting arrears have probably been the most destructive economic, social and political factor in the past decade. A state without payments discipline is a stimulant of tax evasion, it destroys the social contract and makes the loan so expensive that it is ultimately unsustainable. To both reinforce the discipline of payments and to prevent the government from losing control of its budget process, certain constitutional changes are necessary (prohibition of sequestration of payments, possibility for the government to reject certain amendments).
State expenditure and the budget as a whole must be restructured to ensure that the state’s money will be spent first on infrastructure, investment and, more generally, the provision of necessary public goods. This is the most profitable method of using taxpayers’ money with the highest return possible (Aschauer 1989, 1990). By their very nature, public goods are frequently inefficiently produced by the private sector, implying that the public sector must focus on their production (Musgrave 1982).
Possible development of the heterodox scenario
Figure 4 illustrates how different prescriptions in the three suggested directions will combine their effects to create stable and sustainable growth. The rebuilding of the social contract will strengthen first-order legitimacy (L1) and reduce social conflict. The rebuilding of the internal market will create demand-driven growth and provide greater economic predictability. Strengthening the public finance system will lead to better infrastructure and much better stability of public payments, which in itself improves law enforcement by strengthening second-class legitimacy (L2) and thereby positively affects economic predictability .
44Improved first and second order legitimacy will allow for better enforcement of the rule, which will also make the market more predictable, since it will reduce the incentive for illegal economic operations and since legal operations will become more difficult. profitable. Demand-driven growth and improved infrastructure through increased federal government spending will fuel economies of scale and positive externalities (as described in the endogenous growth theory), thereby reducing operating costs and enabling better profit for a given investment. The combination of reduced social conflict, growth in economic predictability, and compliance with the law will improve the investment climate. The latter will be further favored by the lowering of costs and the increase in yields generated by the positive externalities produced by the combination of the reconstruction of an internal market and the reconstruction of the public finance system.
At this stage of our reasoning, public policy, if it is oriented in the three directions just described and implemented according to these prescriptions, should a) generate a considerable improvement in the observation of the rule (social discipline and market), a particularly important requirement for a realistic economic theory when agents are decentralized and able to innovate; (b) allow for significantly increased profit prospects for any public or private investor; and (c) more generally, significantly improve the investment climate.
From there, two feedbacks will begin to activate the growth process, not only to make it sustainable, but also to accelerate it.
Better obedience to the rules, combined with lower running costs and a better rate of return, will develop entrepreneurship. It will itself fuel the investment climate and improve the path to sustained growth. This growth will lead to the validity of the social contract, encouraging first and second order legitimacy; it will reduce social conflicts since the results of growth will be shared in a more egalitarian way and the growth created will have been considered to be correct, and therefore legitimate, by a majority of the country’s population (direct result of the insistence on the construction of legitimacy, allocative and distributive justice, which is proposed in the first direction). This process will improve the obedience to the rules (whether social rules or market rules) and feed itself.
At this stage of our reasoning, public policy, if it is oriented in the three directions just described and implemented according to these prescriptions, should a) generate a considerable improvement in the observation of the rule (social discipline and market), a particularly important requirement for a realistic economic theory when agents are decentralized and able to innovate; (b) allow for significantly increased profit prospects for any public or private investor; and (c) more generally, significantly improve the investment climate.
From there, two feedbacks will begin to activate the growth process, not only to make it sustainable, but also to accelerate it.
Better obedience to the rules, combined with lower running costs and a better rate of return, will develop entrepreneurship. It will itself fuel the investment climate and improve the path to sustained growth. This growth will lead to the validity of the social contract, encouraging first and second order legitimacy; it will reduce social conflicts since the results of growth will be shared in a more egalitarian way and the growth created will have been considered to be correct, and therefore legitimate, by a majority of the country’s population (direct result of the insistence on the construction of legitimacy, allocative and distributive justice, which is proposed in the first direction). This process will improve obedience to rules (be it social rules or market rules) and feed the entire process proposed by heterodox economists. Figure 4 illustrates this first positive feedback loop.
On the other hand, a better investment climate must have a positive impact on foreign direct investment and will thus promote sustainable growth. Sustainable growth will increase tax revenues, allow for increased public spending and, more generally, increase the capacity for public action, with positive consequences for infrastructure improvements. Stable state payments and better law enforcement will strengthen second-class legitimacy (L2). The effects of improved infrastructure will be quickly felt in economic activity and will enable more positive engagement of individual agents in this economic activity: they will take more risks, since they will be able to count on the availability of public good
Economic predictability will be constantly improved, allowing for better projections and investment planning at the micro level. More efficient and legitimate state agencies will also contribute to improving the investment climate.
The second loop of positive feedback is more complex, but its foundation in economic theory is equally strong. The relations involved here are more familiar to orthodox economists, even though they must admit that the problem of the relationship between the social contract and legitimacy must now be taken seriously, something they are not used to. make. This second loop is called the feedback loop for the internal market and public expenditure (Figure 5).
It should not be forgotten that the two loops (social contract and legitimacy and the internal market and public defense) interact on two levels: reduction of social conflict and promotion of entrepreneurship. Loop # 2 interacts with the former through better economic predictability and second-order legitimacy improvements, which reinforces compliance with both stimulus and constraint rules. The effects of endogenous growth generated by public spending on infrastructure will directly promote entrepreneurship, making the creation of new businesses and innovation easier and less risky. It must be added that in the two loops, the effects are not necessarily proportional. To give a simple example, a fragmented increase in public spending will not even be noticed by economic agents. To generate the endogenous growth effects mentioned above, the increase must be consistent and stable for a given moment. The same is true of the stability of state payments. The change here must be spectacular, and the commitment of the state sound and clear, otherwise it will be devoid of credibility. Demand-led growth, which is in a way the starting point, must also be considerable, which implies that all the requirements of Directorate 2 must be fulfilled. The coherence of economic requirements, ie the fact that informal interactions take place at each level, is certainly the most important requirement. We are very far from the orthodox style of reasoning, where relations are linear and mechanistic.Pkmarts.com
Figure 5 – Feedback loop through the internal market and public spending
Figure 5 – Feedback loop through the internal market and public spending
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Conclusion
The heterodox conception of a stable and sustainable growth strategy is based on a realistic understanding of the economic world, validated by scientific studies on individual behavior and information processing capabilities. Where orthodox economists stop half-way, the heterodox explanation is serious about imperfect information and limited knowledge. It therefore extends its reasoning from the economic contract to a social and legal contract, and raises the question of legitimacy, on which even reformed orthodox economists, that is to say, those who understand that there is no market without institutions, remain silent. It is in doing so that only the heterodox point of view is capable of giving a realistic meaning and content to the phrase “dictatorship of law”. By identifying two types of legitimacy (legitimacy of the decision-making process – L1 – and legitimacy of the implementing agencies – L2), the heterodox point of view defended here is capable of translating a theoretical analysis into prescriptions for public action. It can do so, not on an ad hoc basis, that is, by introducing a concept that suits only part of the reasoning, but in an attempt to achieve a complete theoretical coherence.
The overall process of state reconstruction can then be linked in a non-mechanistic way to the more usual economic analyzes such as the effects of demand-driven growth and the endogenous growth mechanism that is well described in the literature. current economic But here the connection is twofold; the lack of realism that the theory of growth might suffer could be remedied by the introduction of an institutional perspective that emphasizes the fact that there is no optimal spontaneous process on which we can count. Here again the formula of the “dictatorship of the law” can be enriched and improved in its content. More comprehensive implications of strengthening federal power can thus be developed.